Bank of N.Y. Mellon Trust Co. v. Solstice ABS CBO II, Ltd.

• Decision Date: 20 December 2012
• Docket Number: No. 09 Civ. 9415(AJP).,09 Civ. 9415(AJP).
• Citation: 910 F.Supp.2d 629
• Parties: The BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee, Plaintiff, v. SOLSTICE ABS CBO II, LTD., Solstice ABS CBO II Inc., Natixis Financial Products Inc. (f/k/a CDC Financial Products Inc.), MBIA Insurance Inc., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

910 F.Supp.2d 629

The BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee, Plaintiff,

v.SOLSTICE ABS CBO II, LTD., Solstice ABS CBO II Inc., Natixis Financial Products Inc. (f/k/a CDC Financial Products Inc.), MBIA Insurance Inc., et al., Defendants.

No. 09 Civ. 9415(AJP).

United States District Court, S.D. New York.

Dec. 20, 2012.

Casey Brian Howard, Locke Lord Bissell & Liddell LLP, Joseph Nicholas Froehlich, Lord, Bissell & Brook, LLP, New York, NY, for Plaintiff.

Charles Richard Jacob, III, Miller & Wrubel, P.C., Eric P. Heichel, Eiseman, Levine, Lehrhaupt & Kakoyiannis, P.C., Jeffrey Q. Smith, Scott E. Eckas, Bingham McCutchen LLP, New York, NY, for Defendants.

OPINION AND ORDER

ANDREW J. PECK, United States Magistrate Judge:

Presently before the Court is: (1) an inquest as to the proper amount of the Termination Payment as of the Early Termination Date of November 9, 2009, including whether the Termination Payment is a payment to or due from interpleader defendant Natixis Financial Products LLC, and (2) interpleader defendant MBIA Insurance Corporation's motion in limine to exclude from consideration on the inquest the testimony of Natixis' expert Michael DiYanni. (Dkt. No. 96: Notice of Motion.) The parties have consented to my decision of these issues on a dispositive basis pursuant to 28 U.S.C. § 636(c). (Dkt. No. 89.) For the reasons set forth below, the Court finds that a Termination Payment of $10,538,773 is due from Natixis.

FACTS AND PROCEDURAL HISTORY

The underlying facts of this case are set forth in Judge Batts' decision on the summary judgment motions. (Dkt. No. 84: 3/28/12 Order.) The facts and procedural history relevant to the inquest are summarized below.

In May 2002, Solstice ABS CBO II, Ltd. (“Issuer”) completed a collateralized debt obligation (“CDO”) transaction (“Transaction”), governed by the Indenture. (3/28/12 Order at 1.) At the closing of the Transaction, the Issuer issued secured Class A–1 Notes, Class A–2 Notes (together with the Class A–1 Notes, “Class A Notes”), Class B Notes and Class C Notes, as well as two classes of equity securities. (3/28/12 Order at 2.) The holders of the secured notes “made loans to the Issuer for the face amount of the Notes in exchange for the Issuer's promise” to pay the principal at their maturity in 2038, in addition to periodic interest payments. (3/28/12 Order at 2.) The Issuer used the proceeds to acquire an asset portfolio of debt instruments (“Asset Portfolio”). (3/28/12 Order at 2.) As trustee, The Bank of New York Mellon Trust Company (“Trustee”) is required to collect the proceeds from the Asset Portfolio and distribute them on the biannual payment dates in accordance with the Priority of Payments provision in Indenture § 11.1(a). (3/28/12 Order at 2–3; see Dkt. No. 97: Biron 7/2/12 Aff. Ex. 2: Indenture § 11.1(a).)

At the closing of the Transaction, the Issuer also entered into the Cashflow Swap Agreement (“CSA”) with Natixis. (3/28/12 Order at 2–3.) The CSA consists of three integrated documents: the ISDA Master Agreement (“Master Agreement”), a Schedule thereto, and a Confirmation. (3/28/12 Order at 4; see generally Biron 7/2/12 Aff. Ex. 6: Confirmation; Dkt. No. 100: Dugan 7/30/12 Aff. Ex. 4: Master Agmt.; Dugan 7/30/12 Aff. Ex. 5: Schedule.) The Master Agreement is a commonly used standardized contract for swap transactions. ( See Dugan 7/30/12 Aff. Ex. 4: Master Agmt.; Biron 7/2/12 Aff. Ex. 6: Confirmation: “This Confirmation is subject to the 2000 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc....”) The Schedule sets forth amendments to the Master Agreement reflecting terms specifically negotiated by the parties. ( See Dugan 7/30/12 Aff. Ex. 5: Schedule.) The Confirmation sets forth the transaction-specific terms of the CSA, detailing the payment obligations of the Issuer and Natixis. (3/28/12 Order at 7; see Biron 7/2/12 Aff. Ex. 6: Confirmation.) Under the CSA, Natixis agreed to advancefunds to the Issuer necessary to make interest payments due to the holders of Class A and B Notes on each Distribution Date when the Interest and Principal Proceeds were insufficient to make those payments. (3/28/12 Order at 4.) The Issuer agreed to pay Natixis a biannual fee of 0.065% ¹ multiplied by the outstanding amount of the Class A and B Notes (“CSA Fee”) and to reimburse Natixis for any payments plus interest, “ ‘ provided ... that Interest Proceeds or Principal Proceeds are available in accordance with the Priority of Payments to make such distributions on such Distribution Date.’ ” (3/28/12 Order at 4–5; Biron 7/2/12 Aff. Ex. 6: Confirmation at 2–5.) Natixis collected $2 million in fees during the CSA's first six years and made its first advance in November 2008. (Biron 7/2/12 Aff. Ex. 9: Natixis 56.1 Counter Stmt. ¶ 29; Dugan 7/30/12 Aff. Ex. 8: MBIA 56.1 Counter Stmt. ¶¶ 45–46.)

At the close of the Transaction, MBIA sold credit protection to the Class A–1 Note holders and agreed to purchase the Class A–1 Notes if the Issuer failed to make required payments. (3/28/12 Order at 3.) Pursuant to the swap transaction, MBIA was paid a fee of 0.085% per annum multiplied by the outstanding amount of the Class A–1 Notes (“MBIA Swap Fee”) for agreeing to purchase the Class A–1 Notes if there was a payment default. (Dkt. No. 115: Sogol 12/3/12 Aff. Ex. 7: MBIA Confirmation at 2–3.) Through November 2009, MBIA received approximately $1.1 million in fees under the MBIA Swap. (Dkt. No. 115: Sloan Aff. ¶ 2.)

In October 2009, a § 5.1(j) Event of Default (“EOD”) occurred because the “ ‘Class A Overcollateralization Ratio on a Measurement Date was less than 101%,’ ” and on October 26, 2009, the Trustee issued a “Notice of Event of Default,” as required under Indenture § 6.2. (3/28/12 Order at 5; see Biron 7/2/12 Aff. Ex. 2: Indenture §§ 5.1(j), 6.2.) ² The EOD pursuant to Indenture § 5.1(j) constituted a “ ‘Cashflow Swap Cancellation Event’ ” under the Confirmation and an “ ‘Additional Termination Event’ ” under the Schedule. (3/28/12 Order at 5, 7; see Biron 7/2/12 Aff. Ex. 6: Confirmation at 5; Dugan 7/30/12 Aff. Ex. 5: Schedule Part I(j)(2)(c).) A Cashflow Swap Cancellation Event means “ ‘that an Indenture Default under Section 5.1(a) ... or (j) of the Indenture has occurred and is continuing’ ” on the determination date. (3/28/12 Order at 7; see Biron 7/2/12 Aff. Ex. 6: Confirmation at 5.) The Master Agreement provides that when an Additional Termination Event occurs, Natixis “ ‘may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date.’ ” (3/28/12 Order at 5; see Dugan 7/30/12 Aff. Ex. 4: Master Agmt. § 6(b)(iv).)

On November 4, 2009, Natixis issued an Early Termination Notice stating that an EOD constituted an Additional Termination Event under Part 1(j)(2)(c) of the Schedule, designating November 9, 2009 as the Early Termination Date pursuant to Master Agreement § 6(b)(iv), and claiming that the Issuer owed it a Termination Payment of $2.2 million. (3/28/12 Order at 5–6; see Dugan 7/30/12 Aff. Ex. 4: Master Agmt. § 6(b)(iv); Dugan 7/30/12 Aff. Ex. 5: Schedule Part 1(j)(2)(c).)

On November 6, 2009, MBIA waived the EOD under Indenture § 5.1(j). (3/28/12 Order at 6.) ³ On November 8, 2009, MBIA issued a letter to the Trustee claiming that because of its waiver, “ ‘all effects of the Event of Default were rendered nullities ... and MBIA must be restored to its former position as beneficiary of the Cashflow Swap.’ ” (3/28/12 Order at 6.) ⁴

On November 9, 2009, a Distribution Date, the Issuer had insufficient funds to pay interest payments on the Class A and B Notes. (Dkt. No. 115: MBIA Supp. Opp. Br. at 9–10; Sogol 12/3/12 Aff. Ex. 17: 11/9/19 Note Valuation Report.) Because the Issuer did not pay the interest due on Class A and B Notes, MBIA was required to purchase the Class A–1 Notes for their outstanding face amount, approximately $82.8 million. (Dugan 11/19/12 Aff. Ex. 15: 11/25/09 Credit Event Notice; MBIA Supp. Opp. Br. at 10; Sogol 12/3/12 Aff. Ex. 13: North Dep. at 214–15; Sogol 12/3/12 Aff. Ex. 18: 11/9/09 Email.) MBIA now holds the Class A–1 Notes and is a third party beneficiary of the CSA. (3/28/12 Order at 3–5, 10.)

On November 12, 2009, the Trustee commenced this interpleader action, and in March 2011, various parties cross-moved for summary judgment. (3/28/12 Order at 1–2.) Judge Batts held that the Cashflow Swap terminated on November 9, 2009 but that Natixis' proposed Termination Payment of $2.2 million from MBIA to Natixis was not proper. (3/28/12 Order at 16, 21–22.)

Specifically, Judge Batts held that:

[T]here can be no dispute that MBIA's waiver of the Event of Default did not render Natixis' designation of an Early Termination Date a nullity. Section 6(c)(i) of the ISDA Master Agreement unambiguously provides that once an Early Termination Date has been designated, “the Early Termination Date will occur on the date so designated whether or not the relevant Event of Default or Termination Event is then continuing.”

(3/28/12 Order at 12.)

With respect to Natixis' Termination Payment calculation, Judge Batts held:

Natixis failed to take into account MBIA's waiver of the Event of Default under the Indenture, which cured the Cashflow Swap Cancellation Event and reinstated Natixis' obligation to make payments under the Cashflow Swap Agreement, as specifically set out in the Confirmation. The Cashflow Swap Agreement unambiguously provides that Natixis was required to estimate the future value of those obligations when calculating the Termination Payment.

Section 6(e) of the ISDA Master Agreement governs payments due upon early termination of the Cashflow Swap Agreement. Section 6(e) provides, “[i]f an Early Termination Date occurs, the following provisions shall apply based on the parties'...